Special Feature
I think it’s fair to say that Lamprell will most certainly not be looking back fondly on the first half of 2012, with the company going from a relative stock market darling and a stock price approaching £4 to an intra-day low of 67p just 6 weeks later! What set the train in motion was the first ‘out of the blue’ profit warning in May when it announced that a trio of global equipment shortage, contract postponements and cost overruns on wind farm machinery had all pressured profits. Chairman Jonathan Silver fell on his sword as a consequence of this.
Looking at the valuation metrics of the business, the one thing that sticks out to me is the lowly net margins that the company works on. For the year ended 2012, management are expecting to report net profit margins of just 2.5% on sales of $1.1bn, down from a net margin of 6.4% for the year ended 2011. This means that the operational gearing in the business is high and when coupled with the debt covenant issue spells R-I-S-K to equity holders. That said, net debt fell from $173m to $91m as they delivered the Hull 108 rig in June.
It is an old stock market adage that profit warnings are ‘like buses’, i.e. they come in threes; what is not usual is that all three come inside of 3 months as in the case of Lamprell! Dependent upon fundamentals, it can sometimes pay to buy a stock after the third warning (unless the stock is JJB which seems to deliver an unending stream..!). The question for us now is: does the current share price offer sufficient value relative to its asset buffer that they are now worth purchasing?
Positivity can be drawn from 2 factors in the Group’s Trading statement of 16th May and that is $1.6bn of orders sitting on the Company’s books through to Q1 and the fact that they had tenders out on some $4.8bn of work. If the Group wins some of these bids, then I doubt that the banks will play hardball over a technical debt covenant breach, particularly as they have embarked on quite an aggressive cost cutting program. Although management have not disclosed what the actual debt covenant breaches are, it is very likely to be EBITDA to interest payments or net cash flow to interest payments as opposed to Fixed cover issues. A current market cap of £223m relative to net debt of circa £60m indicates that the market does not see real survivability issues for the company.
In the latter RNS of 25th July there was a statement that included 2 words generally guaranteed to strike a chill into the hearts of equity holders — “banking covenant”. Lamprell stated — “as a result of these anticipated first half losses, Lamprell will be seeking waivers from certain of its banks in relation to its banking covenants.” Make no mistake, this is not a good sign and it has prompted some institutional holding movement with Ignis and Standard Life, in particular, reducing their exposure to the stock whilst Schroders, interestingly, has been adding. Net debt at the end of June was $91m (approx £60m at current FX rates). There has also been a token amount of stock purchasing by Director Colin Goodall who dipped in for just over 44000 shares at 112p in late May just after the first profit warning (seems he was not aware of the “three” rule!). What has really raised eyebrows, however, is the sale of 450,000 by 2 directors at just over 360p raising a cool £1.62m for Scott Doak & Kevin Isles. These sales occurred just 2 weeks before the profits warning of 16th May that devastated the stock.
18 | www.financial-spread-betting.com | September 2012
If the Company can return to net margins of around 6% for 2013, then net profits of around £40m could be booked. With a market cap of £223m, this is cheap exposure to the all important oil services industry. The question of course is ‘IF’ they can return to these types of margins. Even if they do, the market is unlikely to award Lamprell a premium rating again of 20 times earnings, certainly not for a long time, but a rating of 8 -10 times should not be out of the question and would imply a stock price of 130 - 150p. Of course, in these types of circumstances, there is always the potential for an out of the blue bid for the company too. If this were to occur, then a price approaching 150p would be expected.